Liquid Mutual Funds: An Overview
Liquid mutual funds are a type of mutual fund that invests in short-term, low-risk securities such as government securities, treasury bills, and commercial papers with a maturity period of up to 91 days. The primary objective of a liquid fund is to provide liquidity and safety to investors while generating reasonable returns.
In this blog, we will delve deeper into liquid mutual funds, their features, benefits, and the factors to consider before investing in them.
Features of Liquid Mutual Funds
High Liquidity: Liquid funds provide high liquidity to investors as they can be easily redeemed within 24 hours of the request being made. This makes them an ideal option for investors who are looking for short-term investments.
Low Risk: Since liquid funds invest in short-term securities, they carry a low-risk factor. This makes them a suitable investment option for risk-averse investors who are looking for stable returns.
Competitive Returns: Although liquid funds provide low-risk investments, they still offer competitive returns compared to traditional bank savings accounts. Investors can expect to earn returns of 4% to 6% per annum.
Diversification: Liquid funds invest in a diversified portfolio of securities, thereby reducing the risk associated with investing in a single security.
Benefits of Liquid Mutual Funds
Flexibility: Liquid funds are a flexible investment option that provides investors with the option of investing and redeeming their investments at any time. This allows investors to park their funds for a short period without any penalties.
Low Expense Ratio: Liquid funds have a lower expense ratio compared to other mutual fund schemes, which makes them a cost-effective investment option.
High Safety: Liquid funds invest in securities that have high credit ratings, thereby ensuring that the investor’s funds are safe and secure.
Tax Efficiency: Liquid funds are tax-efficient as they are classified as debt mutual funds, which attract lower tax rates than equity mutual funds.
Factors to Consider Before Investing in Liquid Mutual Funds
Investment Horizon: Liquid funds are suitable for short-term investments ranging from a few days to a few months. Investors should, therefore, consider their investment horizon before investing in liquid funds.
Risk Appetite: Although liquid funds carry low-risk factors, investors should consider their risk appetite before investing in them.
Expense Ratio: Investors should compare the expense ratio of different liquid funds before investing in them. Funds with lower expense ratios may generate higher returns for investors.
Past Performance: Investors should evaluate the past performance of the fund before investing in it. This will provide an insight into the fund’s consistency and returns generated.
Conclusion
Liquid mutual funds provide investors with a low-risk investment option that provides high liquidity and competitive returns. Investors should consider their investment horizon, risk appetite, expense ratio, and past performance before investing in them. By doing so, investors can maximize their returns while ensuring that their funds are safe and secure.
Read more useful content:
- How to invest in mutual funds
- Best Technology Mutual Funds
- All about mutual funds-types & importance
- The Power of SIP Investment in Mutual Funds
Frequently Asked Questions (FAQs)
What are liquid mutual funds?
Liquid mutual funds are a type of mutual fund that invests in short-term, low-risk securities such as government securities, treasury bills, and commercial papers with a maturity period of up to 91 days.
What is the objective of liquid mutual funds?
The primary objective of liquid mutual funds is to provide liquidity and safety to investors while generating reasonable returns.
What is the minimum investment amount for liquid mutual funds?
The minimum investment amount for liquid mutual funds varies from fund to fund, but it usually ranges from Rs. 500 to Rs. 5,000.
How is the return on liquid mutual funds calculated?
The return on liquid mutual funds is calculated based on the NAV (Net Asset Value) of the fund. NAV represents the fund’s total assets minus its liabilities divided by the total number of units outstanding.
How liquid are liquid mutual funds?
Liquid mutual funds are highly liquid as they can be easily redeemed within 24 hours of the request being made. This makes them an ideal option for investors who are looking for short-term investments.
Are liquid mutual funds safe?
Liquid mutual funds invest in short-term, low-risk securities with high credit ratings, which makes them relatively safe. However, like any investment, there is always a risk associated with it.
What are the tax implications of investing in liquid mutual funds?
Liquid mutual funds are classified as debt mutual funds, which attract lower tax rates than equity mutual funds. Short-term capital gains are taxed at the investor’s applicable tax rate, while long-term capital gains are taxed at 20% after indexation.
Can I invest in liquid mutual funds through SIP (Systematic Investment Plan)?
Yes, investors can invest in liquid mutual funds through SIP. However, SIP in liquid funds is not as popular as other mutual fund schemes due to the short investment horizon and low-risk factor associated with them.
How can I choose the right liquid mutual fund for me?
Investors should consider their investment horizon, risk appetite, expense ratio, and past performance before investing in a liquid mutual fund. By doing so, investors can maximize their returns while ensuring that their funds are safe and secure.
How often should I review my liquid mutual fund investments?
Investors should regularly review their investments in liquid mutual funds, at least once every six months. This will ensure that the fund is performing as per their expectations and helps them make necessary changes to their investment portfolio.
